Politics | 18 April 2009

It is difficult to overdramatise the danger that is engulfing our country. In some ways our position is more precarious than in 1940 when we stood alone against the Nazi tyranny.

The danger can be stated easily enough. Far from building up reserves during the latter stages of the boom, the government went on a borrowing spree amounting to £200 billion or so. This borrowing disguised the fundamental structural imbalance in our national accounts. No government, however intent on making the pips of the rich squeak, has been able to raise in taxation more than 37 per cent of our gross domestic product. It is as though one of Adam Smith’s invisible hands has constructed a lead ceiling over the amount of income governments can lift off us taxpayers.

But no such ceiling operates on government expenditure. The most profligate of administrations spend up to half of all the income we create to finance what appears to have been a never-ending extension of public projects. The severity of the current slump magnifies many times over this fundamental faultline. But it is in no way its cause. If the economic recession was reversed this evening the huge imbalance between what governments raise and what they wish to spend would remain.

From the first signs of economic collapse the government has minimised its impact on its balance sheet. The Pre-Budget Report put the amount the government would need to borrow at £78 billion. But since then revenue has collapsed and expenditure is coming in way ahead of the government’s prediction. The unemployment level predicted for the end of 2009 was surpassed in February, meaning a much higher unemployment benefit bill has arrived ten months ahead of schedule. Clearly no one, including the government, has much idea yet of the true magnitude of borrowing. The last guestimate put it at £360-380 billion over the next two years when, at that stage, the government has stopped making any projections.